Volkswagen: When 'Hubris' Leads To A Corporate Governance Disaster -- And Shareholder Pain

Something smells very bad about corporate governance in any publicly-listed business when the threat of litigation - or worse - the possibility of personal doubt at top management levels on its complicity in corporate wrongdoing - appear to propel changes in senior management. But as Michael Horn, head of Volkswagen's U.S. operations announced he was stepping down last week, with Hinrich J.Woebcken replacing him, there were still far more questions than answers on the thinking in its boardroom since it was first embroiled last year in what has been termed "one of the biggest corporate scandals of recent years."

In September last year, I wrote here on Forbes: "The Volkswagen (VW) group now says it has set aside €6.5 billion ($7.2 billion) to deal with the costs it may face as a result of fitting 11 million diesel vehicles worldwide with a device to cheat emissions tests. It is the world’s largest car maker by cars sold, so it carries a burden of standard for the industry as a whole. And take a look at its share price, two days into the revelations and pity the shareholders." No further revelations in this still-breaking story since that time provide any guidance whatsoever as to its understanding of that "burden of standard."

Last month global sales at VW fell 4.7%, while in the United States they fell 13%. As for estimates of the overall costs of the scandal, U.K. media reports place analysts’ estimates of the final cost of the scandal to VW in a wide range - from $5 billion to $50 billion." Repeat - pity the shareholders.

But it is the reasons for the potentially huge variation in final costs that are of real concern. Volkswagen chose at first to talk about "rogue engineers," employees who could be blamed for manipulating software so that the company's automotive output complied with stringent U.S. emission standards. From the start, corporate emphasis has been on denying top-level responsibility after the first "fall guy."

AP Photo/Gene J. Puskar

Martin Winterkorn, the highest-paid boss at a German listed company, resigned as chief executive shortly after the scandal broke. He was sent a memorandum as long ago as May 2014 about a research study that found irregularities in some VW vehicles’ emissions, reported the Financial Times (FT). It was not clear whether Mr Winterkorn read the memo amid his “extensive weekend mail,” the paper quoted the company as saying. It went on to report that in July last year Mr Winterkorn and Herbert Diess, head of VW’s core passenger car brand, attended a company meeting where the “diesel issue” was discussed. “It is not clear whether [the meeting] participants understood already at this point in time that the change in the software violated US environmental regulations,” said VW.

The FT also quoted Arndt Ellingshorst, analyst at Evercore ISU. “VW was an organization full of hubris, you know, dominate the world and walk-on-water type of thinking. This has all led to the situation we are in now,” he said.